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09/09/2007

China's Air Pollution-Becker

It is more or less inevitable that China's economy will spew out a lot of pollution, given its extraordinary rate of growth for over 20 years, and the abundant supplies of coal that fuel its power generation. The important question raised by Posner is what, if anything, will induce China to cut its pollution, including the pollution that spreads internationally to its eastward Asian neighbors and countries in the western hemisphere, especially Canada and the United States.
Posner emphasizes the potential for international collaboration because the harm to these affected countries will tend to exceed the cost to China from cutting its pollution. China is imposing a burden on these other nations that it does not fully incorporate into its decisions about which fuels to use, how to invest in scrubbing and sequestering technologies and equipment that reduce the amount of pollutants that its plants use, its taxation of gasoline that discourage driving and more efficient cars, and the many other ways to reduce pollution. Since greater pollution-reduction efforts would lower the growth rate of its output, the harm to other nations would not enter into its policy calculations unless forced to by threats of economic retaliation, or induced to do so by various forms of intercountry compensation and cooperation.
The New York Times article referred to by Posner indicates that opposition to pollution is also growing rapidly in China itself for reasons that have little to do with protests of other countries. When countries start developing rapidly, their first concern is greater resources for consumption and investment, for they do not believe they can afford to take extensive measures to control air pollution if that slows down their growth out of poverty. As they get richer, however, concerns about the level and growth of various types of pollutants get magnified. As economies continue to develop, their citizens exert greater pressure on governments to improve air and water quality. Governments generally respond by regulating and taxing more extensively the omission of pollutants.
The result typically is that air, water, and other kinds of pollution at first rise sharply with economic development, and then fall about equally sharply as development proceeds still further. This inverted U-shaped relation between a country's level of pollution and its level of GDP per capita is called the "Environmental Kuznets Curve" after the Nobel prize-winning economist, Simon Kuznets. He had established such an inverted U-shaped relation between income inequality within a country and its level of per capita GDP, and researchers discovered about 20 years ago that the same type of inverted U relation holds for environmental damage, such as particulates in the air. In fact, the two Kuznets relations are not independent since one way to reduce inequality in measures of full income that include environmental damage is to reduce the degree of pollution.
Prior to the discovery of this U-shaped environmental relation, the general opinion was that environments were inevitably damaged more as industrialization increased and economies developed. That is still a common view among those unfamiliar with the evidence. To be sure, the full evidence indicates that no single relation between environmental effects and economic development fits all pollutants in all countries. For example, theory predicts that domestic opposition would make governments more responsive to local pollutants of air and water, and less responsive to global pollution, such as emission of greenhouse gases. In fact, the U-shaped relation does seem to hold better for local pollutants.
These Kuznets-type relations are beginning to take hold in China, as judged from the growing complaints about various types of pollution, and discussions by scientists and government officials about steps to take to respond positively to these complaints. This reaction to internal complaints may not be sufficient to satisfy its neighbors in Asia and in the Western hemisphere since as I mentioned, different types of pollution operate within and between countries. Moreover, China's richer neighbors would be more sensitive to pollution than the poorer Chinese are. However, as China continues to develop, the complaints due to "internal" externalities will begin to interact more with the complaints due to the "external" externalities imposed on other countries. The combination of internal and external complaints should push China even faster along reductions in environmental damage than has been typical in the past when countries responded mainly only to internal complaints about pollution levels.

Comments

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About the internal pressure:
It seems that the central government is willing to control the pollution problem, but the local government is not. This result from the specific central-government, local government and local residents relationship.

Lcal government has to choose between two different jobs: the economic growth and the social work, such as public health, public education and also environmental protection. Local government can gain much more benefit from the economic growth than from those social work. Some of them are just grey income and some of them are corruption. Plus local government plays an active role in the economy. If environmental protection slows down the economic growth, their interest will be affected too.

Another line is that GDP growth is a critical factor in the central government's evaluation of the local government official's performance. And this evaluation affect the ups and downs of the high-profile local government officials(Hongbin Li; Li-An Zhou ‚ÄúPolitical turnover and economic performance :the incentive role of personnel control in China‚Äù Joural of Public Economics 2004). Recently the central government has a tendency to change this evaluation principle and more weight is given to the local government performance on the social work. Some concept of Green GDP was formalized and tried, but has little progress.

So the problem turns into how to induce the local government to protect environment when local residents can not exert much influence on them. One option is for the central government to control the evironmental protection agency in provinces directly. But this may result in some other problems.

So it seems it is still a long way to go to have a clear and joyous environment.

I find Zhang's analysis to be very insightful. It seems like we can model the interaction between the local gov't and central gov't authorities as a kind of "Stag Hunt". Both sides should cooperate to find the optimal balance btw. pollution and growth, but they face different incentives and have different time horizons (and "space horizons", for the matter).

Zhang: Thanks for the detailed look at China and its problems. One GREAT advantage they have is that of the US and other developed nations having gone through these problems before them.

"Local government has to choose between"

.......... fifty years ago Los Angeles was nearly ruined by smog and had to "choose" to deal with it before air pollution was a problem only in a few areas. Had they opted to "cheap out" and go for short range increased in GDP, today LA would be an unlivable artifact of a former civilization.

Looking back, it's a shame that they didn't begin to lay the groundwork for mass transit, as today, "mass transit" is eight lane's wide and perhaps averages 40 mph. Still, judging by post WWII bungalows selling for $400 per sf it's still considered a desirable place to live.

Perhaps its myth that in the US we have a short attention span and go for the fast, cheap buck, while we think Asia thinks in much longer terms. But, while in the industrial "sweat shop" level of development it is the case that powerless, generic labor will tolerate miserable conditions and come for the jobs that the centralization of capital has provided. But, when they switch to the need to attract employees who are walking intellectual capital, it is those employees who will decide where they will work. In the LA example the tech and seat of the western financial center is south of LA, much of which was a planned development of the huge Irvine Ranch. So...... your city planners might want to ask themselves if they want to develop what amounts to our "rust belt" cities, many of which are ghost towns, while others have survived but only due to aggressive and costly renewal programs.

Unfortunately, they'll probably want to emulate our "wealth" of each driving their individual car to work. But, what, both they and us should be doing is building, DESIRABLE, mass transit. Ha! Perhaps they should be run by Starbucks! as if we are wealthy enough to drive costly car with one passenger, we should be wealthy enough that mass transit would mean a comfy seat, wireless internet, and a good cup of coffee. As trains are far more fuel efficient it seems pointless to try to attract "customers" who have to stand up in a crowded aisle.

"Another line is that GDP growth is a critical factor in the central government's evaluation of the local government official's performance."

............ hmmm, then it IS a central government choice and problem? I lived in Anchorage, AK during "the oil pipeline boom" and while rapid GDP growth is attractive, in another sense it was distortive and destructive. I realize that in China high GDP growth means very poor people get to eat or have their most basic needs met, but! as you mention, such growth NEEDS a lot of capital, and China's artificially low exchange rates means, in essence, something of a forced savings program, ie save now for a better life....... later. Which gives me a rare opportunity to use a Bushism "go shopping!"

China is probably in its infancy in terms of consumer and mortgage debt??? So in this time of growth, they should be able to consume and grow GDP by taking on debt for housing and consumer durables. And, as a society, instead of lending money to the US to cover our trade deficit, instead invest it in the infrastructure China will need in the near future. What do you think? Jack

Zhang: Thanks for the detailed look at China and its problems. One GREAT advantage they have is that of the US and other developed nations having gone through these problems before them.

"Local government has to choose between"

.......... fifty years ago Los Angeles was nearly ruined by smog and had to "choose" to deal with it before air pollution was a problem only in a few areas. Had they opted to "cheap out" and go for short range increased in GDP, today LA would be an unlivable artifact of a former civilization.

Looking back, it's a shame that they didn't begin to lay the groundwork for mass transit, as today, "mass transit" is eight lane's wide and perhaps averages 40 mph. Still, judging by post WWII bungalows selling for $400 per sf it's still considered a desirable place to live.

Perhaps its myth that in the US we have a short attention span and go for the fast, cheap buck, while we think Asia thinks in much longer terms. But, while in the industrial "sweat shop" level of development it is the case that powerless, generic labor will tolerate miserable conditions and come for the jobs that the centralization of capital has provided. But, when they switch to the need to attract employees who are walking intellectual capital, it is those employees who will decide where they will work. In the LA example the tech and seat of the western financial center is south of LA, much of which was a planned development of the huge Irvine Ranch. So...... your city planners might want to ask themselves if they want to develop what amounts to our "rust belt" cities, many of which are ghost towns, while others have survived but only due to aggressive and costly renewal programs.

Unfortunately, they'll probably want to emulate our "wealth" of each driving their individual car to work. But, what, both they and us should be doing is building, DESIRABLE, mass transit. Ha! Perhaps they should be run by Starbucks! as if we are wealthy enough to drive costly car with one passenger, we should be wealthy enough that mass transit would mean a comfy seat, wireless internet, and a good cup of coffee. As trains are far more fuel efficient it seems pointless to try to attract "customers" who have to stand up in a crowded aisle.

"Another line is that GDP growth is a critical factor in the central government's evaluation of the local government official's performance."

............ hmmm, then it IS a central government choice and problem? I lived in Anchorage, AK during "the oil pipeline boom" and while rapid GDP growth is attractive, in another sense it was distortive and destructive. I realize that in China high GDP growth means very poor people get to eat or have their most basic needs met, but! as you mention, such growth NEEDS a lot of capital, and China's artificially low exchange rates means, in essence, something of a forced savings program, ie save now for a better life....... later. Which gives me a rare opportunity to use a Bushism "go shopping!"

China is probably in its infancy in terms of consumer and mortgage debt??? So in this time of growth, they should be able to consume and grow GDP by taking on debt for housing and consumer durables. And, as a society, instead of lending money to the US to cover our trade deficit, instead invest it in the infrastructure China will need in the near future. What do you think? Jack

Paco: Thanks for saying that. But I am not sure about my modelling skills. I do plan to apply to study for a PH.D in America and get better trained this winter.

Actually, there is another interesting point in the three-tier structure. That is local governments have the tendency to exaggerate their economic statistics. Since these statistics may determine the officials' future of political career and the central government can not detect the manipulation costlessly. Also, local residents who can "feel" the actual outcome of economic growth have not influence in this process. I heard there are some adjustment in the central government. But I donot know how exactly it goes. So can't judge how accurate the final data is.

Jack:
I appreciate you share the experience of LA. But there is a difference here. The political career of LA politician at that time is in the hands of the LA residents who can feel the pollution immediately. They can turn down those politicians who do not care about environmental protection. In China, things are different. Central government determines the political future of local government officials. So the pollution is first felt by local residents who complain to the central government. The pressure is discounted and can only be felt by central government through some big environmental event(such as the pollution of SongHuajiang river in Heilongjiang province in 2005 which affected more than 4 million people's drinking water). So things may be more difficult here.

About consumption:
I do not think China is lack of capital now since so many world big companies are willing to invest in China. China economy is more driven by investment and foreigh trade than consumption which is no surprise, since local governments like to invest and there is large FDI. I am not sure why Chinese people are not willing to consume. Maybe there is something to do with the income inequality. And people like to save because the social security system does not cover all people. But the real-estate market, the automobile market and the stock market are very hot now.

I must acknowlege that most of my judgment come from intuition, not based on systematic data analysis.

Zhang RE: "The political career of LA politician at that time is in the hands of the LA residents who can feel the pollution immediately."

Zhang........ I'm trying to remember how the LA smog clean-up took place. I'm nearly sure no pols led the way, or got elected on a platform of auto inspections and adding pollution equipment which had most people grumbling. I think the spur was something like LA violating a Federal air standard that perhaps had a penalty in terms of a fine for exceeding, or a loss of highway funding. It was a bit later when the people became aware of living in a pall of brown air.

As for a poor country "not being able to afford it" I recall that Mexico (and our US auto makers) "saving costs" by not conforming to US emission standards. Some years later their reward was a time of being allowed to drive autos with odd numbered plate one day and evens the next day. A very clumsy attempt at cutting pollution in half.

........ Ha! there is every prospect as I'm not close to China! I can only apply theory and a bit of US history.

After all, if I am twenty, I may probably buy a cheap car. But if I am forty or fifty, I can have more money to buy a luxury car.

.......... but! as another poster points out, if China follows in our tracks, even with much cleaner autos the results are likely to be: Lots of pollution. Never catching up on building roads. An end to increasing the standard of living. Over 100,000 dying on the highways each year, plus a massive burden on your health care systems of those being wounded or crippled in crashes. Had we an opp to do it over again, rationally, (and w/o being ambushed by General Motors) we'd have a lot more trains and mass transit systems. China has that opp and in many places the population density to make it all work.

"I do not think China is lack of capital now since so many world big companies are willing to invest in China. China economy is more driven by investment and foreigh trade than consumption which is no surprise, since local governments like to invest and there is large FDI."

.......... Yes, I think WE are putting OUR factories there to use your low wage labor for OUR (and the corp's) advantage. I'd point out that before WWII the US got ahead of most other nations by having a slightly higher growth rate that compounded year after year. In that era our exports were a very small percentage of our GDP.

"I am not sure why Chinese people are not willing to consume. Maybe there is something to do with the income inequality. "

.......... Ha! It is becoming the same here; wealthy households have bought most of what the want or need, while those at median or lower wage have precious little discretionary income to spend. So we suffer from overcapacity and poor job growth despite $4 trillion in deficit spending over the last 6 years. But, more seriously, and it would take some modeling to make the case, I suspect that were China to let its currency float upwards, they'd still be the low cost producer and run surpluses. Further, I'd guess the lot of most Chinese would be a lot better were there policies to spur home building etc.

..... The SS problem must be a tough one there. I spent time in Korea when they were poor and w/o SS so SS was having lots of kids in hopes one might get rich or at least the five or so would take care of the parents. With China's population control, that's be only one or two to support the oldsters.

What will induce China to cut its pollution? The answer is greed!... In less than ten years from now, expect China to be the first provider of low consumption devices, energy generators, and may be hydrogen based electricity

The social security system in China covers only city people. Rural people and immigrant workers can not be protected by the system. So it usually happens that when one man from a family is caught with some serious illness, the whole family will go bankrupt.

Yes, I think WE are putting OUR factories there to use your low wage labor for OUR (and the corp's) advantage.

Absolutely. Foreign firms also pay double the wage of local companies in developing countries (see Wolf 2004), so workers do very well from such arrangements. An excellent example of win-win. Thanks for pointing it out, Jack.

Ben, Thanks. In the US as well, it seems the large corporations with strong franchises pay quite a bit better than do local, small business firms. Perhaps Zhang will give us a first hand comment?

Also, perhaps as the election season continues some of your fellow partisans will branch out from their repetitious fearmongering and address our deepening trade deficits, the lack of job creation despite the Keynesian spurring of continual deficit spending that's been denounced as "unsustainable" by both of our recent Fed Chairmen, and whether there are hopes of a future for MI, OH, and the "rustbelt" or will they simply be silently written off as further "collateral damage". "In DEBT we trust?"

Cheers! and may the gavels go to those most responsive to solving our problems, as, if the US "gets it wrong, again" the whole world will suffer the consequences. Jack

Jack:
That is right in China too. Going to work for international companies is almost young people's dream. We get far well paid there.
I am very happy to dicuss with you here. But I am afraid I can not post anymore. This afternoon, my computer has no access only to this blog. I donot know why. Plus I need more time to spend on the application process and my study.
Best regards to all of you!